TMI Blog1975 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... n agreement with a Swedish firm for the manufacture of C.M.C. in India. It may be pointed out at this stage that C.M.C. is a cellulose derivative and in the manufacture of this product raw materials which are used are cellulose pulp, caustic soda and sodium salt of monochloracetic acid. On October 21, 1959, the Registrar of Companies issued the commencement certificate to the company. The company had installed what is known as a cellulose plant for the manufacture of cellulose pulp which in its turn was going to be utilised as a raw material for the manufacture of C.M.C. On March 18, 1961, the production of cellulose pulp in the cellulose plant started and on June 15, 1961, the assessee-company started production of C.M.C. For the assessment year 1966-67, the assessee-company originally submitted a return of income disclosing a net taxable income of Rs. 3,32,975. In arriving at this figure an amount of Rs. 4,78,583 was deducted from the total income claiming that amount to be relief under section 84 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). Section 84 subsequently came to be deleted by Finance (No. 2) Act, 1967, and the deletion has been with effect from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufactured in the month of March, 1961, was by way of trial run or by way of trial production. The Tribunal, therefore, rejected the contention that the production of cellulose pulp during the month of March, 1961, was trial production. According to the Tribunal, in the absence of any evidence to the contrary, the only conclusion which could be reached was that cellulose pulp manufactured by the assessee-company during the month of March, 1961, was a finished product which was marketable. The Tribunal distinguished the decision of the Bombay High Court in Commissioner of Income-tax v. Hindustan Antibiotics Ltd. [1974] 93 ITR 548 (Bom) on which reliance was placed on behalf of the assessee-company in the course of the arguments before the Tribunal and, in the light of the conclusions reached by it, the Tribunal held that this decision of the Bombay High Court was of no assistance to the assessee. The Tribunal having held that the relief under section 84 was not available to the assessee-company in the assessment year 1966-67, the question set out hereinabove has been referred to us for our opinion. Section 84 of the Act is in terms a reproduction of section 15C of the Indian Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section: Provided further that the condition in clause (ii) shall be deemed not to have been contravened if the industrial undertaking is set up in rented premises...... (7) The provisions of this section shall, in relation to an industrial undertaking, apply to the assessment-- (i) for the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or, as the case may be, operate the cold storage plant or plants, and (ii) where the assessee is a co-operative society, for the six assessment years immediately succeeding, and where the assessee is any other person, for the four assessment years immediately succeeding........" It is in the light of these provisions that we have to consider some of the facts which are on the record of this case. Annexure "M" in the reference paper-book before us is a statement of workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .M.C. In 1962-63, out of the total quantity of 124.7 m.tonnes of cellulose pulp produced by the company, it consumed 123.8 m.tonnes in the production of C.M.C. and in that year it produced 303.4 m.tonnes of C.M.C. In annexure "O" to the paper-book the details of the sales of cellulose pulp are shown and this table shows that between April 26, 1961, and May 10, 1961, the assessee-company had sold as much as 14.358 m.tonnes of cellulose pulp. The remaining quantity of 2.6 m.tonnes appears to have been sold partly in the month of October, 1961, and partly in March, 1962. When we go back to the statement, annexure "M" regarding the working days of cellulose pulp plant of the assessee-company it is obvious that the company had produced most of the pulp which was sold between April, 1961, and May 10, 1961, in the months of March, April and May, 1961. Therefore, there is considerable force, in the light of these figures, in the contention which was sought to be urged on behalf of the assessee-company before the Tribunal that the production of cellulose pulp from March 18, 1961, was only by way of trial run and the regular production had started only in 1962. However, we must point out at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when section 84(7)(i) speaks of the undertaking beginning to manufacture or produce "articles". This is as it appears to us on a plain reading of the section. Therefore, it is necessary for us to examine the materials on record to ascertain as to why was this industrial undertaking set up or what was the article which this particular undertaking was intended to manufacture or produce. The industrial licence issued by the Government of India, Ministry of Commerce and Industry, on July 21, 1969, in so far as it is relevant is in these terms: "(4) The new industrial undertaking shall have installed capacity (on three shift operation) for the manufacture of the following as indicated against it. Sodium Carboxy Methyl Cellulose: 1,500 tons per annum." So the industrial licence was for the production of C.M.C. 1,500 tonnes per annum on the basis of the plant operating on three shifts. The industrial licence is annexure "J" in the paper book. Thereafter, the company issued its prospectus and as required by the terms of the industrial licence, the prospectus stated: "A licence has been obtained from the Central Government for the establishment of this new industrial undertaking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. plant in Sweden. Clause 6 of the collaboration agreement is worth noting at this stage and it mentions: "Uddeholm undertakes to investigate the possibility of using cellulose in form of such cotton linters as are available to CPIL (assessee-company) as raw material for the production of C.M.C. technical grades." We should mention at this stage that in the memorandum of association of the assessee-company, the objects clause, as is not unusual in such companies, was in very wide terms and the relevant portion of that clause is as follows: "To carry on the business of manufacturers of and dealers and importers and exporters in chemical products of any nature and kind whatsoever and particularly of carboxy methyl cellulose, cellulose pulp and other chemical products." It is undoubtedly true that the objects clause being in very wide terms, it was open to the assessee-company to manufacture cellulose pulp but the industrial licence, the collaboration agreement and the prospectus make it clear that this particular industrial undertaking which was being installed and started by the assessee-company was for the production of C.M.C. Undoubtedly, the company has, as part of its u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which this section was enacted. Undoubtedly, the object was to encourage establishment of new industrial undertakings and such object was sought to be achieved by granting an exemption from tax to the extent of 6 per cent. per annum on the capital employed in the undertaking in the manner prescribed. If the object is to give exemption from tax, that presupposes that the real object is that the profits are capable of being earned by the company. If such be the object, then until the assessee-company reaches a stage where it is in a position to decide that a final product, which could ultimately be sold in the market, could be manufactured or produced by it, it will be idle formality to say that it had started manufacture or production of articles simply because trial products are prepared with a view to verify whether they can be ultimately used in the preparation or manufacture of the final products. He further observed at page 554: "In our view, if regard be had to the object with which the section was enacted, then the word 'articles ' in section 15C(2)(ii) can only be interpreted to mean articles which are definitely capable of being used by the assessee-company for manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the particular assessee who has established that particular industrial undertaking. Therefore, with respect to the learned judges of the Bombay High Court, we are unable to agree with their conclusions that the word "articles" occurring in section 15C(2)(ii) of the Act of 1922, equivalent to section 84(2)(iii) of the Act of 1961, refers to any intermediate product. In our opinion, regarding the scheme of section 84 as a whole in the light of the object with which the legislature enacted this section, it is obvious that what we have to consider is only the production of the final product or article for the production or manufacture of which the particular industrial undertaking was set up. It is possible that a particular industrial undertaking like the undertaking in the present case is capable of manufacturing an intermediate product which is a marketable commodity. But this particular industrial undertaking before us, on the facts that we have examined in the earlier part of this judgment, was not set up to manufacture that intermediate product, namely, cellulose pulp. Cellulose pulp as found by the Tribunal is a marketable commodity but this particular undertaking was not set up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the manufacture or production of an article within the meaning of section 15C(2)(ii) of the Act of 1922. Therefore, it will depend upon the facts of each case whether the particular industrial undertaking which is under consideration had a phased programme or not and if there was any phased programme of production, what was the particular article for the manufacture of which the industrial undertaking was set up and it is only in the assessment year during which the production or manufacture of that particular article has begun that will be counted as the first year for the purpose of granting relief under section 84. In our opinion, no other possible meaning can be attached to the words " begins to manufacture or produce articles " occurring in section 84(7)(i) when read in the light of the words "industrial undertaking which is to manufacture or produce articles" in section 84(2)(iii). In Rajeswari Mills Ltd. v. Commissioner of Income-tax [1963] 50 ITR 29 (Mad) the Madras High Court has pointed out that where a company sets up different industrial undertakings, section 15C of the Act of 1922 applied to each undertaking independently of the other. The fact that the textile i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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